Reading investment newsletters' fine print

Steering clear of wild claims and sticking to the letter poses challenges

SAN FRANCISCO (MarketWatch) -- If you've ever subscribed to investment newsletters or received their solicitations, you know these publications can make bold promises about how their advice will beat the market.

Yet many investment newsletters don't live up to this pledge. Maybe the publication's strategy is out of favor, or maybe it's simply out of touch. The financial newsletter field is mined with exotic strategies that purport to make you money. But with subscriptions averaging about $230 a year, often it's newsletter publishers' pockets that bulge.

"Are there some good newsletters?" said John Markese, president of the American Association of Individual Investors. "Yes, but you still have to find one."

Deciding which newsletter fits your investing needs isn't easy. Perhaps 1,000 publications in the U.S. cover a gamut of investment styles. Many are buy-and-hold stock portfolios culled from old-fashioned gumshoe analysis. Others are disciples of share-price momentum and relative strength, while some rely on elaborate market-timing formulas or sophisticated futures, options and similar leveraged products.

"We've seen just about everything," Markese said. "Newsletter writers writing something, then claiming it means something else, or writing things that could not be deciphered. Short of 'My dog ate the newsletter,' we've read it all."

The investment newsletter business is itself no dog. By some estimates the industry takes in several hundred million dollars a year in revenue, but it's essentially unregulated. A 1985 Supreme Court ruling determined that financial newsletter publishers are not investment advisers under Securities and Exchange Commission regulations; all anyone really needs to pontificate on stocks is a printer and a mailing list.

Accordingly, "many people are skeptical of investment newsletters," said John Buckingham, editor of The Prudent Speculator, a monthly newsletter whose buy-and-hold investment strategy has about 10,000 subscribers. "It's an industry that unfortunately is filled with wild claims, because that's how you market."

SEC rules do apply to newsletter publishers who manage money or run mutual funds, as Buckingham does with the Al Frank Fund
VALUX, +0.20%
and sibling Al Frank Dividend Value Fund
VALDX, +0.23%

"The newsletter, being a marketing piece in theory for those other businesses, is something we have to be careful about," said Buckingham, who leads a four-person team involved in stock research and the monthly publication.

Dues diligence

Before you pay for a newsletter -- or subscribe to another one -- keep in mind some important considerations besides performance.

Above all, a newsletter should match your investment objectives and risk tolerance. "Some people will never be market timers, so for them to read market-timer newsletters could be disastrous," said Markese, whose Chicago-based organization publishes a stock investing newsletter of its own.

If you become a paid-up subscriber to one of these publications, follow it to the letter. "When you start parsing advice and following only what you want to do, then you've lost the value of the letter -- if there is any," said Markese, who also sits on the advisory board of The Hulbert Financial Digest, an independent monthly publication that tracks about 200 investment newsletters and is a service of MarketWatch, the publisher of this report.

"What I tell people to do is to find a strategy they can actually live with through a bear market," added Mark Hulbert, the Digest's editor.

Order back issues of a desired newsletter that cover periods of market downturns, Hulbert said. Try to gauge what your reaction would be had you been using the publication then for guidance. And make sure you understand what the newsletter writer is saying. Hulbert also recommends virtual, or paper, trading with the letter's current issues for a couple of months to understand how it would feel to have your money on the line.

Moreover, see if you even have time to implement a newsletter's advice, Hulbert said. Some strategies demand close monitoring of buying and selling activity, he noted. "If you don't have the time, there's no shame in admitting that. There are perfectly decent strategies that don't require that attention."

Slow and steady

Why do some financial newsletters stand out? Discipline and time, Hulbert said -- qualities investors need to carry out that newsletter's directive.

Judge a publication on its 10-year record at least, accounting for the risk taken to produce results, Hulbert added. "I used to think five years was enough," he said. "Five years is not enough to differentiate those with ability from those whose performance might be due to luck alone."

On a risk-adjusted basis, the top newsletter for the decade through May was No-Load Fund*X, up an annualized 16.9% with slightly more risk than the Dow Jones Wilshire 5000 Index, which returned 8.3% annually on average, according to The Hulbert Financial Digest.

Other newsletters with favorable risk-return trade-offs in the past 10 years include Investment Quality Trends, gaining 12% annualized with about two-thirds of the U.S. market's risk; Investment Reporter, adding 15.5% annually with similar risk to the market; and No-Load Mutual Fund Selections & Timing Newsletter, averaging a yearly 8.1% return but shouldering less than half the market's risk.

Buckingham's The Prudent Speculator was the decade's top-gainer, up 21.4% annualized, but its extensive use of margin contributed to its high-risk rating, almost twice the risk of the Dow Jones Wilshire 5000.

"Those at the top have a willingness to stick with their strategy during those hopefully temporary times when they're out of synch with the market," Hulbert said. "Time is a great risk-adjustor."

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.